Bonds retrace after near-record yields

Dow zaps deficit to surge 100-plus points

RachelKoning

NEW YORK (CBS.MW) -- Benchmark 10-year yields pulled off their 39-year lows late in Wednesday's session as stocks staged an impressive rally.

The short end of the yield curve saw yields continue to edge north from their lows of last week. Participants are unwinding trades reflective of hopes for dramatic interest rate cuts this year.

The long end of the market rang up a fourth winning session on Wednesday, driving benchmark yields to the lowest point in nearly four decades. A 30-year bond shot a full two points higher at one point, but had halved that advance by the U.S. close.

The latest economic news, taken in tandem with the Federal Reserve's shift in its assessment of risks to the nation's economy, support ideas for a slow recovery or a probable interest-rate cut sometime this year, analysts said.

Further, a low-inflation environment and much uncertainty over the stock market have cast Treasury debt in a favorable light for much of this year.

A 10-year Treasury note was up 6/32 at 102 18/32 to yield
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4.06 percent, down 2 basis points from the previous session. This note fell below 4 percent for the first time since the early 1960s.

With the Fed-sensitive short end of the yield curve having carved out its own record lows a week ago, this sector would appear to have scant room to advance much further, thus pushing investor interest in fixed-income investments out along the curve, traders said.

Deadline looms

An afternoon stock rally stole some of the bond market's wind.

With all eyes on Corporate America and the Aug. 14 financial statement certification deadline, major stock averages have been all over the board, but the Dow had put on 200-plus points and the Nasdaq tallied a 5-percent gain at the final bell. See Market Snapshot.

Chief executives and chief financial officers required to vouch for the accuracy of their financial statements continued to submit the necessary certifications Wednesday with the Securities and Exchange Commission. The deadline is 5:30 p.m. Wednesday. Read full story.

Concern about the U.S. economy's ability to bounce back lowered the dollar to its weakest mark against the yen in five weeks.

The greenback hit 116.69 yen in recent dealings, from 118.37 in the New York session on Tuesday. The U.S. currency weakened to 98.62 cents per euro from 98.37.

The greenback has forfeited 11 percent against the yen and 10 percent against the euro so far this year.

Inventory increase

Paced by a jump in stocks of cars and trucks, inventories at U.S. businesses expanded by 0.2 percent in June, the Commerce Department reported Wednesday. This was more than economists had been predicting and matched a May gain of 0.2 percent.

The back-to-back increase in inventories is the first since the period between late 2000 and early 2001, a Commerce official confirmed.

An increase in inventories could waylay a tentative economic recovery, economists said. Others were less concerned, given a still very low 1.36 inventory-to-sales ratio. Get the full story.

Rate allure

The 10-year Treasury yield can have important implications for the mortgage market, leaving some analysts to laud its impact in aiding an economic recovery over the shorter-term borrowing instrument used for the Fed's monetary policy.

As Tony Crescenzi, bond market analyst with Miller Tabak & Co., explained: Households have $8.1 trillion in liabilities. Of that total, $5.5 trillion takes the form of mortgage debt. Credit cards and the like amount to just $1.7 trillion.

Mortgage rates are tied to the yield on the 10-year note, while credit-card debt is tied to the prime rate, which in turn is benchmarked against the fed-funds rate.

"At this stage, the drop in the yield on the 10-year T-note, and hence mortgage rates, is more important to households than a lowering of the fed-funds rate," he said. "This is especially important now because mortgage rates are in territory that enables households to act upon the drop in market rates, and thus receive a benefit.

"It's only if mortgage rates were higher that the decline in the fed-funds rate would be more important, because households would benefit from a decline in credit card-rates while receiving little benefit from a decline in mortgage rates."

Longer-term yields plunged further as well on Wednesday. A 30-year bond gained 2 points at 108 6/32 to yield
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4.84 percent, down 12 basis points and in territory not visited since the global debt crisis of 1998.

At the 3 p.m. U.S. close a 2-year note was off 8/32 at 100 10/32 to yield 2.09 percent, up 12 basis points from the previous session. A 5-year note was down 10/32 at 100 10/32 to yield 3.18 percent, up 6 basis points.

The yield curve, which charts returns on government debt from the shortest bills to the 30-year long bond, continues to unwind a portion of the steep shape put in place when odds favored the view that the Fed would be slashing interest rates aggressively this year.

Fed policymakers on Tuesday left a key interest rate at a 40-year-low 1.75 percent, indicating it remains of the view that low rates would eventually kick in to help the economy.

However, the group said it now has shifted its view of economic risks from a neutral stance put in place in March to a view reflective of a greater chance for a return to recession. See related story.

Still, Wall Street economists have adjusted earlier predictions for several rate cuts this year and now predict one such cut or perhaps no action unless the economy fizzles further. Short-term interest rate futures contracts see a better than 70-percent chance that the Fed will cut interest rates at its meeting next month.

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